Thierry Bros, a senior research fellow of The Oxford Institute for Energy Studies sat down with Neftianka to discuss Russia’s future prospects in the LNG market.

Neftianka: You’ve been an analyst on both Russia and LNG markets for decades. You tell us, is LNG Russia’s top energy priority right now?

Bros: The government wants to be a decent player in the LNG world, and again, if you are the government, you have to address the question if you want to be a major LNG player, and ten years later you are a small player, but nowhere near where you wanted to be. It is difficult and risky for companies, therefore we need to partner one way or another.

Today we are in a world where there is too much LNG, other sources are drastically changing merit order system. The Russian government needs to answer one very simple question, is LNG strategic or not? It will need to adapt model to produce. If it decides that the project isn’t strategic, then the market can do it.

We are seeing a relaxed LNG world. I think companies have to think that its still a capitalist world, so you have to think about what type of strategy you want. If you have depletion of historical fields, then you need to find new fields.

You’ve been in the analyst trenches for quite some time now. What do you think about the current slump in LNG prices? Will Russia be able to influence LNG pricing the same way they were able to play with European gas pricing?

I think the Russian state will never be able to control the LNG price, it will be like Brent for oil. The question is, “Do we have sufficient market power LNG to understand the mechanics?” And right now the answer is no. The way to better understand the mechanics is to do more projects.

In order to better understand the LNG market, this means more Russian players and better reporting to the government. In a world where pipeline gas is going to be connected with LNG, Russia has an interest in understanding, but not necessarily controlling, the mechanics of LNG.

There is a very simple question if you are Russia is pipeline gas at discount to LNG, and if so, how can I price this?

The LNG “success” story that everyone is talking about these days is Yamal, an LNG plant with16.5 mtpa that looks like it can break even at $30/barrel prices, even though the area is remote and the technology advanced.

Novatek succeeded in understanding, thanks to Total [partner in Yamal LNG] that costs and CAPEX can’t go through the roof. They understood making it profitable from day one. We can’t twist the spreadsheet, the only way for this to go ahead is for the Russian government to take control, to provide tax holidays, port infrastructure, etc. Novatek and the Russian government definitely came out with a win/win situation.

Yamal has strong state support, provide LNG on time and on budget, a new thing in the LNG world these days. Russian LNG provided by different actors. Remember no monopoly in LNG world. Not enough to put Russia on the LNG map. Still second class player when it comes to LNG. Policy makers would like LNG to become more relevant in Russia.

Conversely, the Shtokman LNG project was thought to be risky, and was postponed. You cant say on your spread sheet you’ll add it up later, it has to be adapted from day one.

Gazprom’s Sakhalin, Russia’s first LNG project, had problems in term of CAPEX during the building phase, but now it operates perfectly fine.

We’ve seen LNG projects on maps for many years, but so far there are only two in Russia [Sakhalin and Yamal].

And what about Gazprom’s Vladivostok LNG project that has been officially shelved since late 2015?

If you are Gazprom, it makes sense to expanding Sakhalin because its cheaper.

Gazprom has never built an LNG liquefaction plant [their partner on the project, Shell, was the operator up until 2009].

Gazprom is extremely good at pipes and conventional upstream. LNG is challenging for them. I think Vladivostok LNG was on the map back many years ago because it was a hedge to Power of Siberia, but with Power of Siberia going ahead, they don’t need

Vladivostok LNG would in theory involve an undersea pipeline from Sakhalin to Vladivostok. Is it really profitable to use pipelines in an LNG project?

Gazprom is used to doing pipelines. They can do the profitability analysis and decide yes or no.

How do energy companies become more vertically integrated? What’s Gazprom’s future in an LNG world?

These big companies have the challenge to adapt – Exxon has the same problem with oil: Their mantra will be “oil, oil, oil” for how long? Gazprom has an advantage as a gas company, its one step ahead in the energy transition. This is why Rosneft is so pushy in breaking into the gas market. Gazprom understands there is a huge risk of unbundling, and for it to try and avoid it, in needs to be profitable day in and day out.

If you are Gazprom, you have to make your case stronger, and that means delivering what the state is expecting.

Gazprom will have a duty to do LNG projects in Russia. If your shareholders ask you do to something that isn’t profitable, you can come back and negotiate.

Of course it is easier to do in Europe, because Gazprom has a long history there, and Asians are tough bargainers. And when we compare this move to what’s going on in Europe, we see it’s a good for Gazprom. They are going to have a tendency to move towards Asia due to financing, sanctions, etc.

Will the Russian government support future LNG projects? How does this change with the 2013 law to “liberalize” the market, letting in new players Novatek and Rosneft to export abroad?

My understanding is that the Russia is creating competition between two national companies, Rosneft and Gazprom, and now Novatek.

It could be a good start. If you want liberalization of markets, this may be a good tool to use later on to move away from regulatory price. If you want to have a price of Russia that is reflective of the market.

Interestingly enough, the Russian government has opened the market to all the companies, and since this law, only one project. Did I pass a law for only one project, or am I going to tell the other companies that its time to deliver?

OK, last question. Do you think that St. Petersburg has the potential to be an LNG pricing hub?

Right now it is for a few players, but you have to start somewhere. You can use a hub as a pricing tool.

Gazpromneft-Sakhalin, a subsidy of Gazprom Neft (itself the oil division of state-owned Gazprom) has received a license to explore and drill on Sakhalin Island, Russia’s budding LNG hub situated north of Japan.

The company got permission to drill and produce hydrocarbons from the Ayashsky shelf, part of the Sakhalin-3 project. The other two blocs in the Gazprom-operated project are Kirinsky and Vostochno-Odoptinsky.

The first exploration well is to be drilled oil going this summer and a 3D seismic survey has already been carried out over a 2.15 square kilometer area.

Gazprom Neft joins Russian energy giants Rosneft and Gazprom on the remote island in the Okhotsk Sea, where the companies respectively head up the Sakhlin-1 and Sakhalin-2 projects. Gazprom Neft’s first exploration well will be drilled this summer. The license, granted by Russia’s state subsurface agency, Rosnedra, is valid through July 2039.

The Ayashsky bloc, which Gazprom Neft estimates contains more than 100 million tons of oil or oil equivalent, is sandwiched between the already operating Sakhalin-1 and Sakhalin-2 fields.

This is the first time Gazpromneft-Sakhalin received a license in the Sea of Okhortsk. Previously, the company had only obtained licenses to drill in Arctic blocs.

He answered questions from 32 journalists on a variety of topics, from the run-of-the-mill topics such as the economy , Russia’s diplomatic spats, to the bizarre themes, such as suggesting FIFA’s Sepp Blatter deserves the Nobel Peace Prize or endorsing Donald Trump for president.

But at Neftianka, we blog about oil and gas, so we compiled everything Putin said at this year’s press conference about Russian energy.

1. $50 per barrel oil is too optimistic

“Our calculations [for the 2016 budget] were based on the oil price of $50 a barrel. Now the price is $38. We will have to correct something there,” Putin said on Thursday.

Low oil prices have wreaked havoc on the Russian economy, which is expected to contract 3.7% this year. Putin says the forecast for economic growth of 0.7% in 2016, and 1.9% in 2017 are based on $50 per barrel oil prices.

2. Does the Russian government plan to privatize part of Rosneft, the country’s biggest oil company?

“This (large-scale privatization) is possible, and in principle we will continue this work,” Putin said, adding he wasn’t sure that the market conditions are currently optimal.

The Russian government owns a controlling stake in many of the country’s major oil and gas companies: Gazprom, Rosneft, and Bashneft to name a few. Many industry experts argue this makes them inefficient and subject to state interests, while others argue without government support, they would be worthless.

In 2012, the Russian government (which is headed by the Prime Minister, Dmitry Medvedev) announced their plan to sell off 12 large state-owned companies, including Rosneft.

Russia’s current Finance Minister, Anton Siluanov, supports the privatization of Rosneft, and said it could happen as soon as next year.

3. TurkStream

Negotiations on TurkStream, which was meant to replace the canceled South Stream, have been on hold since the downing of a Russian fighter jet over Turkish territory last month. The pipeline would have initially have had the capacity to transport 63 billion cubic meters of natural gas from Russia to Turkey under the Black Sea. The project, which would send a majority of the gas onto Europe and fill the gap of the failed South Stream, was slated to be finished as early as 2016.

At present, negotiations are stalled.

“We haven’t stopped on negotiations. We need written guarantees from the EC that the routes will be made a priority. But so far, we see nothing of that sort, and will not take any step that isn’t in our economic interest,” Putin said.

4. Nord Stream II

The expansion of Nord Stream, a pipeline that transfers Russian gas directly to Germany, would quickly and easily solve Gazprom’s dependence on delivering supplies through Ukraine.

Once expanded, the pipeline, which runs along the seabed of the Baltic Sea, will have the capacity to deliver 110 billion cubic meters of gas, or about 2/3 of Europe’s total yearly demand. Gazprom will build and operate the pipeline with Germany’s E.ON, BASF/Wintershall, Austria’s OMV, ENGIE of France, and Royal Dutch Shell to expand the pipeline.

However, the project has recently met opposition from some EU members who believe either 1) Germany will have too much power over natural gas or 2) it gives Russia too much control over EU energy affairs.

“Nord Stream and the future Nord Stream II were motivated by the demand for reliability, market-based operations, and high standards of legal and administration standards. If our Ukrainian partners do the same, we can work with them. If not we’ll look at alternatives,” the president said.

5. Ukraine transit

Nord Stream and TurkStream are meant to reroute Russia’s European gas exports away from Ukraine. Gazprom is pre-emptively expanding its energy network in Europe, because as of 2019 when its contract with Kiev expires, Russia may no longer send any supplies via Ukraine, its traditional conduit.

However, if TurkStream and Nord Stream continue to face obstacles, transit through Ukraine may continue.

“On a corporate level, during heated debates I personally heard someone saying we will stop the transit … I am not sure that we should cut transit through Ukraine,” Putin said.

6. South Stream

Before TurkStream and Nord Stream II, Gazprom originally planned to use the South Stream pipeline beneath the Black Sea to send its gas to Europe. The project was halted in mid-construction, because the European Commission and Russia couldn’t agree on terms.

“You know our views, we were ready to implement this project, but we weren’t allowed to. We were surprised by Bulgarians (who could have got $3 billion, plus 400 million euros in transit fees per year) who are acting against their economic interests.”

7. Yamal LNG

Putin is confident that Yamal LNG project will go ahead, despite major delays in future finance. The project is a joint operation by Russia’s Novatek, France’s Total, and China’s CNPC to ship liquefied natural gas from Russia to global markets.

“This is a needed project. Sales of LNG will grow and today, we are selling energy in the Far East, or on swap agreements (done by Gazprom), but this is a huge Chinese, French, Russian joint project that can go to all the foreign markets,” Putin said.

Putin also added that the port could become universal, and ship other various goods in addition to LNG, including cargo.

Only $10 billion of the $27 billion Yamal LNG project has been financed, and next $20 billion needs to be externally financed, mostly from Chinese Banks and the Silk Road Fund.

A majority of Russian oil comes from well-developed fields in Western Siberia, where resources are fast depleting, and industry experts companies aren’t prepared to fill the future production gap.

Exploration of new oil fields in Russia never stopped since the Soviet times, according to Putin, because, “nobody wants to kill the goose that lays the golden egg.” The Russian government stimulates exploration by both state-owned and private companies, Putin said.

Alexey Miller, chief executive of Russia’s largest gas producer Gazprom, topped Forbes Russia’s top-paid managers list for the first time ever, hauling in an estimated $27 million in 2014.

Miller, who has been at the top post at Gazprom since 2001, was one of the few top-paid Russian executives to see his salary increase in dollar terms this past year, given the ruble’s massive devaluation.

Forbes published its annual ranking of Russia’s best-compensated CEOs on Thursday. The estimates are calculated using the companies’ compensation disclosures, in addition to analysis by Forbes journalists.

In second place was Andrey Kostin, CEO of Russia’s second-largest lender VTB, who saw his salary drop to $21 million from $37 million in 2013. In third place is another energy tsar, Igor Sechin, head of Rosneft, who made $17.5 million in 2014. This is the first time Sechin’s salary was published by Forbes Russia’s since the magazine was sued after reporting his salary was $50 million in 2013. After that, the Russian government ordered top executives from state-owned companies to make their salaries public.

Miller and Sechin’s pay are on par with companies that are far outperforming either Russian energy giant. ExxonMobil boss Rex Tillerson’s salary was estimated at $33 million in 2014 and Bob Dudley was compensated $12.74 million by BP.

Both Miller and Sechin are considered longtime confidants of Russian President Vladimir Putin, and have both worked with him since the 1990s, dating back to the president’s time in the St. Petersburg mayor’s office.

The more than $10 million gap between Miller and Sechin’s salaries would make sense if Gazprom were performing much better than Rosneft this year, which is not the case. Net income fell steeply and net debt increase by almost 50 percent.

Like Rosneft, Gazprom is suffering from low oil prices, but due to decreased demand from Europe, Gazprom is massively under producing. It is estimated in 2015 Gazprom will only produce 450 billion cubic meters of its 617 billion cubic meter capacity.

Back in 2008, when the company was valued at $360 million, Gazprom head Alexey Miller forecasted that within a decade the oil conglomerate would become the world’s largest company with a market capitalization of $1 trillion.

Now its market capitalization hovers around $51.5 billion. In the last year, stocks have lost more than 35 percent of their trading value.

However, it’s not all doom and gloom for Gazprom, as projects such as Nord Stream II, a pipeline from Russia to Germany, and two potential pipelines to China could strengthen the company’s position.

In October, Russian President Putin will have to make a decision on breaking up Gazprom, the country’s largest exporter of natural gas, RBC reported. The company will likely have to give other companies, such as Novatek, Lukoil, Rosneft, and Surgutneftegas access to their pipelines and gas storage facilities.

Russia’s Federal Antimonopoly Service (FAS) has long been working to break up Russia’s “national treasure”, and believes that liberalizing the export market will bring about more fair and competitive gas transport prices and tariffs.

The verdict on whether or not to divy up Russia’s national breadwinner is split. The company, which accounts for 8 percent of Russia’s economy, is seen as a source of pride for many Russians. In 2012, when Russians were asked where they would work if they could choose any large company, 44 percent said Gazprom.

If the company is split, Rosneft is clearly a winner, as it will be able to sink its teeth into the $400 billion gas deal Gazprom sealed with China in May 2015.

According to Golomolzin, discussions are being initiated by Rosneft. If action is taken, Gazprom will also lose its monopoly on gas exports to China, and Rosneft will be allowed to send its oil to China via Gazprom’s pipelines.

Vladimir Blinkov, the lead researcher at the Russian Institute for Strategic Studies, has accused the FAS of ‘anti-Gazpromization’, alleging that the regulator has a conflict of interest in helping Gazprom’s competitors.

The split shouldn’t be a shock to anyone, Gazprom has been under attack since the 1990s. In 2007 then-First Deputy Prime Minister Dmitry Medvedev gave the FMS orders to look at Gazprom. In 2013, Russian President Putin signed into law amendments to the gas export law aimed to break Gazprom’s monopoly on foreign export, particularly LNG.

Even though Gazprom achieved revenues of 4.48 trillion rubles in 2014, is a relic of the Soviet Union and isn’t keeping up with its competitors in profit. While in 2014 Gazprom’s profits reached 157 billion rubles, Surgneftgaz posted 885 billion rubles in profits. Rosneft outpaced Gazprom in profits by hundreds of millions, and Lukoil, the country’s second-largest oil company, topped it by about 24 billion rubles.

Novatek and Rosneft will aggressively take advantage of the liberalized export market and begin the export of liquefied natural gas (LNG), especially to growing Asian markets.

The behemoth has failed to innovate, especially in LNG technology, since a majority of the company’s revenues (50%) are made in pipeline transport of natural gas to Europe, a very lucrative market.

Competitors Novatek and Rosneft are eager to get into the LNG market, and already have plans for LNG facilities. Currently, Russia only has one LNG plant in operation, the Sakhalin-2 project in the Far East, a joint project between Gazprom (50%), Royal Dutch Shell (27.5%), Japan Mitsui (12.5%), and Mitsubishi subsidiary Diamond Gas (10%). Despite falling demand from Asia, the terminal plans to produce 10.8 million tonnes in 2016.

Rosneft plans to launch its own LNG plant on Sakhalin with a 5 million tons per year capacity in 2020. ExxonMobil is a partner.

Novatek’s Yamal LNG project in the Arctic, once finished, will have a 16.5 million tonnes per year capacity. Novatek has partners with France’s Total and China’s CNPC.